Among the responsibilities of DIY fund trustees is an obligation to consider the need for all members to have some insurance cover through their superannuation.

For many funds, the result will be a decision recorded in a fund minute that might say something like “After considering the need to hold insurance for each member and taking into account the kinds of insurance permitted via super and the cost involved, it was determined there was no need to take out insurance for the member".

The minute might also state the decision will be reviewed if there is any material change in either the member’s or the fund’s circumstances.

A statement like this, says Suzanne Mackenzie of DMAW Lawyers in Adelaide, should satisfy the fund’s auditor who is expected to check that this statutory duty – a requirement since August 2012 – has been performed by the trustees.

The requirement is an operating standard under super law that carries a fine of up to $17,000 if trustees intentionally ignore this.

That said, requiring DIY fund members to hold insurance is not mandatory. What is compulsory is giving it some consideration. By contrast, trustees of large super funds regulated by the Australian Prudential Regulation Authority must offer life ,and total and permanent disability insurance on an opt-out basis to members of super arrangements like the MySuper product.

DIY fund members, on the other hand, are expected to be self-reliant when it comes to insurance and can choose whether they want it in their fund or outside their fund or whether they want insurance at all. It’s an exercise serious trustees will go into if they really want to understand any benefits insurance can bring.

Those DIY trustees choosing not to include insurance, says Mackenzie, are likely to be older with little or no need for the cover. Those more likely to need it are younger with commitments such as mortgages and families. Where they need life cover, it’s smart to take advantage of the cheaper insurance available in the group life and group disability policies organised by large funds.

Related Quotes

Company Profile

A look at costs shows why insurance is for those who are younger. Industry fund AustralianSuper’s insurance calculator puts the cost of $1 million of group life insurance cover at about $640 a year for a 30-year-old.

The same cover for a 50-year-old costs about $1810 a year, and for a 60-year-old, it’s about $6050.

Life and disability insurance cover in a DIY fund is usually more expensive than group cover through a larger fund, although both forms of insurance are tax deductible.

It’s the tax deductibility that prompts those interested in life insurance to consider it through super, DIY super technical specialist Craig Day of Colonial First State says.

If you have life or disability insurance outside super, you don’t get a tax deduction. Within super the Tax Act says if a trustee holds a life insurance policy that pays a benefit at death or permanent disability, the fund trustee can claim the premiums as a tax deduction.

Insurance bought outside super is paid for with after-tax dollars but in super, it’s paid for with before-tax dollars. This can result in a big saving on the premium cost.

For a top rate 46.5 per cent taxpayer, every $100 of insurance premium outside super will cost $187 in after-tax dollars. For a 38.5 per cent taxpayer, every $100 will cost $162.

Inside super, the 15 per cent tax deduction can be a valuable entitlement. While every $100 of super contributions made through a salary sacrifice arrangement might ordinarily be taxed at 15 per cent, that it will attract a 15 per cent tax deduction when it is used to pay an insurance premium means the full amount can be applied to paying for the insurance. That’s because the insurance deduction cancels out the tax on the contributions.

Day says this gives the fund trustee the whole $100 of super to pay for the insurance compared with much less outside super. So a member in a super fund can potentially acquire the same amount of insurance in super compared with outside super for less cost. Or a greater amount of insurance can be acquired for the same cost as buying it outside super.

Now to tax. Insurance paid to a fund member’s dependant (a spouse, child under 18 or a student under 25) is tax free, like an insurance entitlement from a policy owned outside super. Day explains this is because of the way death benefits tax works, as insurance is added to a late member’s taxable super component.

A tax dependant beneficiary (a spouse) gets an offsetting tax rebate to ensure the tax is reduced to zero. The amount is still counted towards taxable income so it can act against entitlements to other concessional income like any family tax benefits.

But an insurance benefit paid to a non-dependant (such as an adult child who is not financially reliant) is taxed as part of a fund’s taxable component.